Urbanization and Inequality in Asia

Kanbur, Ravi, Zhuang, Juzhong, Asian Development Review

This paper provides a quantitative analysis of how the changing dual economic structure and urbanization affect inequality in Asia. Focusing on data for four countries-the Peoples' Republic of China, India, Indonesia, and the Philippines-the paper asks three questions. First, how much of the past increase in inequality can be attributed to urbanization per se-the rising share of urban population, as opposed to other drivers related to the region's dual economic structure, such as the urban-rural income gap, inequality within the urban sector, and inequality within the rural sector? Second, how might urbanization affect these countries' inequality in the future as its process continues? Third, moving forward, what is the relative importance of each of these drivers in containing rising inequality in Asia? It is hoped that the framework developed and calculations presented in this paper provide more insights into the dynamics of rising inequality in Asia and can help policy makers prioritize policy actions for confronting it.

This paper is motivated by three stylized facts for Asia over the last 2 decades. First, inequality has risen significantly relative to historical trends. As highlighted in ADB (2012a), more than 80% of Asia's population now lives in countries where inequality has risen in the last 20 years. Second, rural-urban income gaps in Asia are significant, reflecting the dominance of but also a changing dual economic structure in a large part of the region. For example, the rural-urban divide accounts for close to 20% of the economy-wide inequality in Indonesia and the Philippines, 25% in Bhutan, India, and Viet Nam, and 45% in the People's Republic of China (PRC), and this divide has increased sizably in some countries. Third, urbanization has proceeded apace. Asia's share of urban population has increased from 40% to 46.2% in the last 2 decades (ADB 2012b). In the PRC, the share of urban population increased from 27% in 1990 to 52% in 2012 (World Bank 2012).

The evolution of inequality at the economy-wide or national level is a complex phenomenon, impacted by history, culture, technology, demography, and policy. It is not our intention in this paper to provide a comprehensive explanation of inequality trends in Asia. Instead, the purpose of this paper is narrower and more focused. Given the three stylized facts and using data for four Asian countries - the PRC, India, Indonesia, and the Philippines, we look at how the changing dual economic structure in Asia and particularly urbanization have impacted the evolution of national inequality in the past and how the former might impact the latter in the future.

Urbanization features strongly in the classic analysis of inequality and development by Kuznets (1955). In his seminal 1955 paper, Kuznets identifies a number of forces that together may lead to the well-known inverted U-shaped Kuznets curve - as a country develops, inequality increases initially and declines after a certain average income level is attained. These forces include the concentration of savings among rich households which tends to increase inequality as a country moves to higher income levels; and political pressures for income redistribution, demographic changes, the emergence of new industries, rising importance of services sector incomes (that rely more on individual excellence), and urbanization, all of which, according to Kuznets (1955), tend to help reduce inequality as a country becomes more and more developed. The Kuznets hypothesis has been tested empirically by many, although results have not been uniformly supportive.

To illustrate how urbanization affects inequality at the national level, Kuznets (1955) uses numerical examples and shows that, holding within-rural and withinurban income distributions and the urban-rural income ratio constant, the mere population shift from the lower-income and lower-inequality rural sector to the higher-income and higher-inequality urban sector could lead to an inverted-U curve - inequality first increases, reaches a turning point and then declines. …

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